From platform collapses to regulatory changes, there is a lot to keep up with in the peer-to-peer lending sector.
With this in mind, Peer2Peer Finance News hosted a Regulation Breakfast Briefing at The Soho Hotel in London with a panel comprising Nike Trost, senior manager at the Financial Conduct Authority (FCA), Atuksha Poonwassie, managing director of Simple Crowdfunding and director of the UK Crowdfunding Association (UKCFA), Andrew Holgate, chief executive of Equitivo and Frank Brown, managing consultant at Bovill.
The panel and Q&A session delved into the current and future regulatory framework and provided a practical insight into how to address any challenges ahead of imminent rule changes.
Additionally, Bruce Davis from the UKCFA, the FCA’s Trost and Brown of Bovill made speeches, giving the audience their take on the current state of P2P regulation.
The invite-only event – attended by chief executives and compliance heads from P2P platforms – was supported by headline sponsor Bovill and sponsors Equivito and Quantuma. It was also backed by the UK Crowdfunding Association.
The breakfast event – held under Chatham House rules – provided delegates with plenty of food for thought, so how will the sector cope with what is being served? Reporting by Marc Shoffman
MOST PEOPLE WOULD associate December with preparations for the festive season, but the peer-to-peer lending sector has its own regulatory gift coming that month when the Financial Conduct Authority’s (FCA) finalised rules for platforms go live.
Platforms, consultants, analysts and regulators gathered at a Peer2Peer Finance News briefing on 27 June to discuss how to get ready in time for the 9 December deadline.
The biggest talking point on most people’s lips was appropriateness tests.
The FCA has introduced new marketing restrictions and appropriateness tests as part of its long-running review of the sector.
Under the City watchdog’s rules, platforms will be restricted to marketing to sophisticated and high-net-worth investors, people receiving regulated investment advice and those who certify that they will not invest more than 10 per cent of their portfolio in P2P loans.
P2P platforms will need to carry out an appropriateness assessment that considers a client’s knowledge and experience of the P2P investment before the platform can accept a subsequent instruction to invest.
At the breakfast event, there were calls from P2P platform executives for more clarity over what an appropriateness test should look like. There were also queries regarding at which stage an investor would need to complete the test. For example, whether it would be when a potential customer registers on the website or when they are actually ready to invest.
Some industry stakeholders warned that it could be difficult for all firms to get their systems prepared in time for the December deadline.
There were also worries that new customers could be deterred from the sector, as investors may look elsewhere if it appears too difficult to put money onto a platform.
But consultants in the room said firms should be ok with the regulatory changes as long as they can show and explain their workings.
Panellists agreed that the tests cannot just comprise yes/no questions and some suggested trade associations, consultants and regulatory feedback could help the market.
There was also a concern that the 10 per cent rule could land platforms in hot water. One audience member suggested there could be issues if an investor lied about complying with the limit and later complained.
Questions were raised over whether completed appropriateness tests should be taken at face value or whether they would need independent verification. A comparison to the US was made, where accountants need to verify this sort of information.
Another attendee questioned whether the 10 per cent rule would shut out most investors if a platform had a minimum investment of £1,000 as that would require £10,000 of savings, which many members of the public do not have.
This would require platforms to instead favour sophisticated and high-net worth investors.
A sophisticated investor is defined in the FCA’s conduct of business rulebook as someone who is either a member of a network or syndicate of business angels for at least six months, has been so for at least the last six months, has made more than one investment in an unlisted company in the past two years, has previously worked in a professional capacity in the private equity sector or in the provision of finance for small- and medium-sized enterprises, or has been a director in the past two years of a company with annual turnover of at least £1m.
A high-net-worth investor is defined as someone who had an annual income of £100,000 or more in the latest financial year or net assets of £250,000 or more.
The shift in investor type wasn’t the only concern. There were also warnings that the level of work needed to create and manage appropriateness tests would sway the industry in favour of the big players with larger compliance teams, deter new entrants and result in a diminished sector.
Stakeholders generally agreed that there will be more barriers to entry but some also argued that more consolidation could be a positive outcome for the sector, leaving the best and brightest players.
However, some noted that stricter banking regulations have not deterred start-ups such as Starling and Monzo, so refuted the idea that the updated rules would deter new entrants.
There was also discussion of whether the regulations could have made distinctions between different business models and types of lending, but it was felt this would create more uncertainty and confusion.
The rule changes come as the industry battles against the negative publicity of the collapse of Lendy and last year’s closure of Collateral.
The FCA’s new rules have aimed to beef up platforms’ wind-down plans, as well as ensuring that there is more transparency over defaults and the risks being taken by investors.
Some industry figures at the event warned that there was a danger of P2P platforms relying on continued growth and not paying enough attention to their wind-down plans.
When it comes to managing risk, platform executives at the event were asked to consider if this was something they would let their granny invest in.
It was also pointed out that many platforms aren’t lending their own money and are recommending loans despite not having ‘skin in the game.’
Some questioned whether independent and external verification was needed to assess the risk and safety of a platform, while others debated whether regulation solved this, although it was pointed out that regulated firms can still fail.
It was concluded that the biggest test of the success of the regulations would be if any future platform failures are due to market dynamics rather than mismanagement.
Platform executives were supportive of these changes, despite there being outstanding issues, but there were some areas of the FCA’s work that they were concerned about.
One of the biggest talking points was the City watchdog’s warning about the risk of Innovative Finance ISAs (IFISAs) and mini bonds that came out in peak ISA season.
There was a feeling that the announcement was poorly timed and the FCA was unfair to associate IFISAs with unregulated mini bonds, with some attendees noting that stocks and shares ISAs can be more volatile yet do not get such negative attention.
Furthermore, stakeholders raised the point that the P2P loans in an IFISA are the same as those outside a wrapper so if it is high risk loans the FCA is concerned about, it should be talking to the platforms in question rather than criticising the IFISA wrapper.
It wasn’t just P2P regulations that attendees were concerned about. Issues were also raised about firms operating in unregulated spaces such as bridging and business lending, which compete with P2P.
It was warned that a lack of regulation for some types of firms created an uneven playing field and could be detrimental for borrowers. Others said it was difficult to fully regulate the bridging and business lending space. There were some suggestions that the FCA could introduce a regime similar to buy-to-let rules where consumer or accidental landlords get more protection than professionals. This, however, could mean appropriateness tests for the borrowers, which was seen as a step too far.
Beyond regulations, delegates expressed their views on how their investors behave, particularly when it comes to sharing sensitive information.
Attendees highlighted that investors were frequently breaching terms and conditions and putting debt recoveries at risk by sharing information about loans that have fallen behind with repayments. Some asked whether forums should be regulated, but others said it was important investors had places to express their views or negative information would just end up in the press.
It was even suggested that the issue of investors sharing private information could result in legal action. Some industry onlookers said that the industry should do a better job of explaining the debt recovery process to investors and be more transparent about the situation.
Overall, delegates welcomed the tighter regulations and their impact on the sector. The changes were seen as a positive move that will help the market to develop and become more stable. The main concern is keeping investors interested and getting it right in time for the December deadline.
This article featured in the August issue of Peer2Peer Finance News, now available to read online.